Fed waits to tighten amid global weakness, stronger dollar

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The US Federal Reserve has hinted since last year at a gradual tightening of monetary policy, but the central bank kept its benchmark interest rate at an unprecedented near-zero range Thursday.

The decision followed last month’s Chinese stock correction, which played havoc on global financial markets and drove up the dollar as panicked investors fled to US assets.

The Fed’s monetary policy committee decided to wait for more evidence of US economic strength “in light of the heightened uncertainties abroad and a slightly softer expected path for inflation,” Chairwoman Janet Yellen said.

“We want to take a little bit more time to evaluate the likely impacts on the United States,” she said.

Expectations on Wall Street for action on interest rates – either Thursday or next month – had been high until last month’s stock swoon.

A survey released by the 17-person monetary policy committee showed 13 members still expect an interest-rate hike this year, down from 15 of 17 members in the Fed’s last survey in June.

“Yes, October remains a possibility,” Yellen said in a press conference after the Fed decision was announced.

The bank has two more scheduled 2015 policy statements: October 28 and December 16.

The Fed, which monitors economic data – especially employment and inflation – to calibrate its monetary policy, has held interest rates since December 2008 at an unprecedented low range of zero to 0.25 per cent.

In its statement, the Fed said its benchmark rate “remains appropriate.”

The slack monetary policy is meant to “support continued progress toward maximum employment and price stability,” the bank said.

The Fed’s monetary policymaking committee expects that an interest rate hike “will be appropriate … when it has seen some further improvement in the labour market” and is “reasonably confident” that currently very low inflation will rise back to normal levels, the statement said.

The US economy regained momentum in the second quarter, expanding at an annual rate of 3.7 per cent in the April-June period after a first-quarter slowdown, according to the government economists.

The US has been in economic recovery since July 2009, with the unemployment rate falling in August to a seven-year-low of 5.1 per cent, down from a post-crisis peak of 10 per cent in October 2009.

US consumer prices dropped by a seasonally adjusted 0.1 per cent last month compared to July, government data showed this week, as falling oil prices suppressed any hint of inflation. For the last 12 months, prices on all goods in the United States are up 0.2 per cent, according to the Bureau of Labour Statistics’ price survey.

The Fed bases its 2-per-cent inflation target – intended to provide price stability while avoiding deflation – on a separate inflation gauge measuring personal spending.

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